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The Clash of the Cultures: Investment vs. Speculation

ISBN: 978-1-118-12277-8
353 pages
August 2012
The Clash of the Cultures: Investment vs. Speculation (1118122771) cover image

Recommended Reading by Warren Buffet in his March 2013 Letter to Shareholders

How speculation has come to dominate investment—a hard-hitting look from the creator of the first index fund.

Over the course of his sixty-year career in the mutual fund industry, Vanguard Group founder John C. Bogle has witnessed a massive shift in the culture of the financial sector. The prudent, value-adding culture of long-term investment has been crowded out by an aggressive, value-destroying culture of short-term speculation. Mr. Bogle has not been merely an eye-witness to these changes, but one of the financial sector’s most active participants. In The Clash of the Cultures, he urges a return to the common sense principles of long-term investing.

Provocative and refreshingly candid, this book discusses Mr. Bogle's views on the changing culture in the mutual fund industry, how speculation has invaded our national retirement system, the failure of our institutional money managers to effectively participate in corporate governance, and the need for a federal standard of fiduciary duty.

Mr. Bogle recounts the history of the index mutual fund, how he created it, and how exchange-traded index funds have altered its original concept of long-term investing. He also presents a first-hand history of Wellington Fund, a real-world case study on the success of investment and the failure of speculation. The book concludes with ten simple rules that will help investors meet their financial goals. Here, he presents a common sense strategy that "may not be the best strategy ever devised. But the number of strategies that are worse is infinite."

The Clash of the Cultures: Investment vs. Speculation completes the trilogy of best-selling books, beginning with Bogle on Investing: The First 50 Years (2001) and Don't Count on It! (2011)

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Foreword By Arthur Levitt ix

Acknowledgments xiii

About This Book xv

Chapter 1 The Clash of the Cultures 1

Chapter 2 The Double-Agency Society and the Happy Conspiracy 29

Chapter 3 The Silence of the Funds: Why Mutual Funds Must Speak Out on the Governance of Our Nation’s Corporations 65

Chapter 4 The “Mutual” Fund Culture—Stewardship Gives Way to Salesmanship 103

Chapter 5 Are Fund Managers True Fiduciaries?: The “Stewardship Quotient” 139

Chapter 6 The Index Fund: The Rise of the Fortress of Long-Term Investing and Its Challenge

from Short-Term Speculation 167

Chapter 7 America’s Retirement System: Too Much Speculation, Too Little Investment 213

Chapter 8 The Rise, the Fall, and the Renaissance of Wellington Fund: A Case Study—Investment

Wins, Speculation Loses 251

Chapter 9 Ten Simple Rules for Investors and a Warning for Speculators 297

Appendix I: Performance Ranking of Major Mutual Fund Managers–March 2012 323

Appendix II: Annual Performance of Common Stock Funds versus S&P 500, 1945–1975 325

Appendix III: Growth in Index Funds—Number and Assets, 1976–2012 327

Appendix IV: Wellington Fund Record, 1929–2012 329

Appendix V: Wellington Fund Equity Ratio and Risk Exposure (Beta), 1929–2012 333

Appendix VI: Wellington Fund Performance versus Average Balanced Fund, 1929–2012 335

Appendix VII: Wellington Fund Expense Ratios, 1966–2011 337

Index 339

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John C. Bogle is the founder of the Vanguard Group of mutual funds and President of its Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996 and senior chairman until 2000. In 1999, Fortune magazine named Mr. Bogle as one of the four "Investment Giants" of the twentieth century. In 2004, Time magazine named him one of "the world's 100 most powerful and influential people," and Institutional Investor presented him with its Lifetime Achievement Award. In 2010, Forbes magazine described him as the person who "has done more good for investors than any other financier of the past century." In January 2012, some of the nation's most respected financial leaders celebrated his distinguished career at the John C. Bogle Legacy Forum, held at New York's Museum of American Finance.

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The Clash of the Cultures: Investment vs. Speculation”   is a must read for investors who want to understand the forces that are working against them and what they can do about it to maximize their investment returns. It should come as no surprise to those who know Jack and his philosophy that the final words of his final book are:  ‘Stay the course!’—Forbes

The Clash of the Cultures: Investment vs. Speculation is . . . an enjoyable read that ends with 10 lessons for investors that, while simple, are deeply valuable to the general public. . . Clash of the Cultures is a great summary of the breadth of Bogle's 60-plus years in the investment field. He offers observations on the shocking change in the culture of finance that he has witnessed first-hand. Among the most important of the shifts is that short-term speculation has crowded out long-term investment. Though this has been great for the financial sector, it has come at the expense of the public.” —CBS MoneyWatch

“Bogle, as the Godfather of index investing, has ideas that are timeless and based on simple math, and at the same time exhibit uncommon sense and a routinely overlooked view of how investors are consistently overcharged by the financial services industry. Fortunately, his wisdom is widely available to everyone. Much of that wisdom has been assembled in Bogle's most recent book The Clash of the Cultures: Investment vs. Speculation (Wiley, 2012). While most of the insights are time-honored themes in the Bogle canon, they are very useful for individual investors.” —Reuters

“Bogle's latest book tackles what looks like an artificial distinction. His Clash of the Cultures title conjures thoughts of world war and social strife. But he's talking about ‘investment vs. speculation’. . .  As in his previous books, Bogle is a master of the clear point and the pithy quote - from the investment writings of John Maynard Keynes and Benjamin Graham, pension adviser Keith Ambachtsheer and Bogle's old mentor the late Walter L. Morgan, as well as the Gospels of Luke and John.”—Philadelphia Inquirer

“You know what to expect when opening a book by John Bogle, founder of the Vanguard mutual fund group and inventor of index funds: a lament about the fall from grace of the US mutual fund industry, and a restatement of his strong conviction that COSTS MATTER!!!  Mr Bogle’s new book, The Clash of the Cultures , Investment vs Speculation, does not disappoint on either count, but it is also very much in tune with the zeitgeist in its focus on stewardship and fiduciary duty.  It lambasts US mutual fund managers for neglecting to act as responsible owners of the companies they invest in on behalf of the savers whose money they look after, and for their own governance failures.”—The Financial Times

“[The Clash of the Cultures] echoes many familiar . . . themes worth repeating, because they are too often ignored. Investors spend so much time chasing hot asset classes and hot fund managers that they end up buying high and selling low, all the while incurring transaction costs. In Mr Bogle’s words, ‘investors need to understand not only the magic of compounding long-term returns, but the tyranny of compounding costs.’ . . . The American pension-fund industry has been particularly bad at understanding these long-run fundamentals. Many schemes assume, on the basis of past performance, a return of 7.5-8%, a figure that is highly implausible given the current low yields. . . Meanwhile, many employees in the private sector have been switched into defined-contribution schemes. . .  But employees are not saving enough, are not allocating their portfolios efficiently and are incurring too many costs. It is hard to disagree with Mr Bogle that the ‘system of retirement security is imperilled, heading for a serious train wreck.’ But will anybody listen to him, when they haven’t in the past?” —The Economist

“John Bogle’s latest book, as much a piece of history as is it a playbook for how to repair financial markets scarred by two bear markets in 10 years and a loss of confidence, is one of those books on finance that ought not be left unread. The Clash of the Cultures is the latest and perhaps best book by the founder of Vanguard Group. . . Plus, for those not familiar with Bogle’s prose, the man can turn a phrase, which makes the book all the more enjoyable.”—IndexUniverse

“If the Occupy Wall Street movement is serious about helping people with real financial issues, then its leaders should read John Bogle’s book and embrace his ideas for change.”—Rick Ferri, Forbes.com

“John Bogle’s story is an oft-told tale, yet even Bogle junkies will learn some fascinating new facts from The Clash of the Cultures. Bogle takes of the cudgels on behalf of investors, who he believes have been poorly served by most of the industry. Bogle brings invaluable historical perspective to current issues ranging from high-frequency trading to the looming crisis in the U.S. retirement system to the use of mutual fund investors’ money to promote the growth of assets under management. Every thoughtful investor can benefit from his wisdom, served up with refreshing modesty by a giant in a field notorious for outsized egos.” —Financial Analysts Journal

“The book is a gem. Well-researched and carefully argued, there's simply no way to argue with Bogle's premises -- that the little guy always loses, that the more you churn the more you lose, that most people's retirements are dramatically underfunded, that management looks out for itself and not the stockholders, and that greed is driving the bus. . . Read Bogle, not just to learn about how to protect your investments and understand what really happens on Wall Street. But more than that, read The Clash Of The Cultures and declare yourself into the three percent who have ideas and aren't afraid to use them.” —The Huffington Post

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August 13, 2012
The Clash of the Cultures

The Clash of the Cultures: Investment vs. Speculation

By John C. Bogle 

NEW YORK – John C. Bogle, the founder of the Vanguard Group, is back with a new book about how short-term speculation has crowded out a focus on prudent long-term investment and intrinsic value.

In The Clash of the Cultures  (Wiley, $29.95, August 2012; Hardcover), Bogle hones in on the clash that has become more pronounced and extreme – to the detriment of long-term investors while generating short-term profit for official market activity speculators – that is fundamentally changing capital markets and capitalism.

During the last five years, the United States financial system has raised $250 billion a year on average in IPOs and secondary offerings, while trading volume came to an astounding $33 trillion. That means that over 99.2 percent of stock market activity is speculative, and 0.8 percent is invested. Bogle recommends a return to the traditional standards of long-term investment and a commitment to trusteeship to turn that around.

The Clash of the Cultures reflects Bogle’s more than 60 years of experience working on behalf of investors. He describes the culture of mutual funds when he started in 1951 as one of stewardship, where professionals acted in the best interest of owners. Today the culture is dominated by salesmanship, with fund managers placing their own interests ahead of their shareholders. “Most mutual fund managers have failed to live up to their responsibilities of corporate citizenship,” Bogle writes.

Bogle exposes the “happy conspiracy” of our “dual-agency society.” Money manager/agents and corporate manager/agents have developed an unhealthy, symbiotic relationship that lies at the heart of our financial system’s problems. Institutional investors, who own 70 percent of all shares in U.S. corporations, are too focused on evanescent stock prices rather than intrinsic corporate values.

A chapter on America’s Retirement System lays out Bogle’s ideas for how to make retirement savings work. He wants to fix Social Security, and to move defined contribution savings plans towards viable retirement plans. He wants to minimize investing costs in the plans and limit the risk of outliving policies through mandatory low-cost annuities.

Bogle also calls for a federal statute of fiduciary duty, which would require fiduciaries place the interest of clients ahead of their own. Conflicts of interest that are all too common at money management conglomerates would be disallowed. The statute would outline the rights and responsibilities of corporate governance, foster prudent investment policies focused on long-term intrinsic values, and put the interests of fund shareholders ahead of the interest of fund managers and of the conglomerate’s public shareholders.

Bogle encourages readers to “become part of the army of investors who will stand up and be counted, deal with the powerful challenges that await our society, and serve our great nation in the years ahead.”

Using a mixture of history, case studies and statistics, Bogle dissects the current culture of the financial markets and offers solutions on how practices can be improved for the future, making The Clash of the Cultures a must-read for everyday investors as well as Wall Street professionals.

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